Tuesday, September 30, 2008

"These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'" said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

Rep. Barney Frank (D-Mass.), the ranking Democrat on the House Financial Services Committee, said the administration's position is driven by concerns about the financial safety and soundness of the companies "to the exclusion of concern about housing." Committee members were ready to support legislation that would give the Treasury Department oversight of Fannie and Freddie, as the administration has sought, Frank said, not power over the companies' housing activities, which are regulated by the Department of Housing and Urban Development.

Now he seems to have forgotten what he said back then, and the fact that he was encouraging the moral hazard created by the GSEs encouraging and buying up bad loans.

UPDATE: A friend points out this post at the Big Picture blog by Barry Ritholtz arguing that the Community Reinvestment Act and GSEs had nothing to do with the housing bubble. While I think Ritholtz makes some excellent points that demonstrate there were other factors, he doesn't really address the GSE moral hazard issue and he makes this statement that seems to me to offer a striking disconnect from reality:

"The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvestment Act ?" All of those cities have very large non-affluent minority populations. I'm most familiar with Phoenix, where the housing bubble was marked by expansion of housing into South Phoenix (where I live), Gilbert, Mesa, Queen Creek, Surprise, and other outlying areas around Phoenix which have very large Hispanic populations. Also see my comment below about mortgage broker telemarketing targeting low-income areas of town with minority majorities.

He wants to place the blame on deregulation, but if you need to find a single cause, I think the Fed keeping interest rates too low is a better root cause. My own experience regarding telemarketing showed that there existed regulations that could have been applied to the sleazy telemarketers that simply weren't being enforced. When you have an enforcement problem, all the regulations in the world won't help, in fact adding more regulations is likely to increase the severity of your enforcement problem.

UPDATE (November 21, 2011): Barry Ritholtz argues persuasively that the Community Reinvestment Act had nothing to do with the housing bubble. He also downplays the role for the GSEs, though I think they had a contributory role (which is also what the Financial Crisis Inquiry Commission concluded) to play in increasing the size of the bubble--they purchased half of the U.S. mortgage market by
2008, $5.1T in loans, including $90B-$175B/year in subprime and Alt-A
between 2002 and 2006. But the above analysis overlooks other important factors including the repeal of Glass-Steagall, the 2004 SEC decision to reduce capitalization requirements on investment banks, the Commodity Futures Modernization Act of 2000 which allowed credit default swaps with little regulatory oversight, and inaccurate credit ratings from the Nationally Recognized Statistical Rating Organizations. Wikipedia's entry on "Subprime mortgage crisis" has a good referenced list.

I agree with "themel." It's a mistake to put all the blame on the GSEs, and it's a mistake to absolve them of any blame.

There was a lot of mortgage fraud on the part of mortgage brokers--these are the same people who I was suing for illegal prerecord telemarketing calls in 2003, total scumbags with no regard for any law, who were deceiving people into taking out loans they couldn't afford just to keep the fees and commissions rolling in. There were also people taking out loans who were committing fraud, there were banks creating fraudulent investment products out of securitized mortgages, the ratings agencies were complicit by giving out high ratings to that toxic garbage while accepting money from the banks they were giving the ratings to, and the GSEs were happily buying up the garbage as well.

The reason that Paul LaChance of Millennium Mortgage Group in Tempe was running an autodialer and calling people like me in 2003 (while also doing things like withholding employee payroll taxes yet not paying the IRS, and taking customers from his former employer NovaStar Mortgage, and getting sued all over the place) is that he was able to make a lot of money at it by immediately being able to resell all of those mortgages to a larger company/bigger fool, ultimately up to the GSEs, who were the penultimate fools in the chain. (The ultimate fools have now been demonstrated to be the U.S. taxpayers.)

I should add that the Arizona regulators were completely useless--I reported the mortgage fraud I came across in my telemarketing lawsuits to the Arizona Department of Banking, that was responsible for regulating mortgage brokers, and they refused to do anything even when I pointed out the specific banking regulations and statutes being violated.

One more point relevant to the CRA--I believe I got a lot more mortgage prerecords than anyone else I know because I live in South Phoenix. I think the unscrupulous brokers were specifically targeting low income people in South Phoenix, and sought leads by robo-calling every prefix in the area. When I sued LaChance, I ended up talking to some other people who were also suing him. A former employee of his told me about another lawsuit by a Hispanic couple who spoke virtually no English, who got put into a bad mortgage and claimed to have been defrauded. That's only a single example, but my suspicion is that Hispanics in South Phoenix were targeted by sleazy mortgage brokers.

"I think the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress, or by me when I was president, to put some standards and tighten up a little on Fannie Mae and Freddie Mac." — Bill Clinton, Good Morning America, ABC, 25 September 2008.